Investors Will Take Heavy Losses In The Banco Espirito Santo Bail-In

Portugal announced that it would spend €4.9 billion to rescue and reorganize the bank, splitting the company into a "good bank" and "bad bank."

Under the plan, Banco Espirito Santo's junior bond holders will be subject to the steep losses incurred by BES's exposure to the Espirito Santo, a conglomerate that has exposure to real estate and hotel holdings, among other things.

Claus Vistesen at Pantheon Macroeconomics, however, notes that the cost of bank failures, "almost always turns out higher than initially estimated," adding that he sees no reason this should be different.

In addition to levying heavy investor losses, dealing with BES is also putting Portugal's financial system in a precarious spot.

"The stakes remain high for Portugal, however, as it is far from certain that the full contribution of shareholder equity and subordinated debt is bad enough to wind down the bad assets. Further losses would almost surely fall on the government as the new owner of the bank," Vistesen writes.

And so the risk of a broader fall out from the BES situation still exists, but at least for now, this chart from Pantheon shows just how steep the losses will be for BES investors.

Equity holders have been nearly wiped out and Banco Espirito Santo's subordinated debt is trading at about 30 cents on the dollar.